LIBERALISING the Licensing Regime

  12 min 37 sec to read
 LIBERALISING the Licensing Regime


On June 1, CG Communications Limited, a Chaudhary Group company, started fibernet services in the Kathmandu valley under its brand CG Net. The Group, which had initially planned to operate telecommunications services became an Internet Services Provider (ISP) after being repeatedly denied a unified operating licence required to start mobility services in the country.

Chaudhary Group, the conglomerate headed by Nepal’s first Forbes billionaire Binod Chaudhary, stepped into the telecommunications business by buying a majority stake in STM Telecom in 2013.

Ever since that purchase, CG has been trying to obtain a unified operating licence by meeting all the legal and procedural obligations. However, the Nepal Telecommunications Authority (NTA) in February 2020 scrapped the limited mobility licence CG Telecom which the company had been using as a rural telecommunications services provider citing the telco’s failure to renew the licence on time. The then Minister for Communications and Information Technology Gokul Prasad Baskota claimed that CG Telecom needed to pay Rs 20 billion in advance to get the unified operating licence. As per the rules, all telecom operators are required to pay the amount 10 years after getting the licence. This has put the Rs 25 billion investment, which Chaudhary Group has planned to invest in developing telecommunications infrastructure and services across the country, in jeopardy.

Telecom industry insiders say that this issue is more about political interference and bureaucratic red tapism than compliance of rules and regulations. According to them, the government’s unwillingness to foster a competitive environment in the telecommunications sector is behind the high charges ordinary Nepali customers have to pay for voice and data services.

The Remnants of ‘Licence Raj’
During the Panchayat era, the term ‘licence raj’ was often used to describe various difficulties entrepreneurs and businesspersons had to go through to obtain a licence to operate a business due to the rigid permit regime, bureaucratic red tape along with a cultural mix of corruption, nepotism and favouritism. Back then, businesspersons close to members of the royal family, Panchayati politicians and influential bureacrats would get permits easily, whereas it would be an uphill task for other investors.

The term was actually borrowed from India as this situation was prevalent in the largest South Asian economy during the years between 1947 and 1990. The situation in Nepal began to change slowly during the final years of the Panchayat system and accelerated in the early 1990s when the government adopted economic liberalisation opening up the financial, industrial, services, mining, agriculture and many other business sectors for investors and relaxing restrictions for foreign investments. As a result, the Himalayan nation witnessed an impressive economic growth during the 1990s before going through an economic slump and stagnancy in the ensuing years caused by the Maoist insurgency and the resulting political instability.

The problems faced by CG Telecom clearly indicate that remnants of the ‘licence raj’ still exist to hinder the growth of business in the country even after the country changed its economic course to liberalisation after the democratic change of 1990. Not only in telecommunications, getting operating permits is difficult in areas like capital market, aviation, mining, among others. Allowing banks to operate stock brokerage services has long been a hot debated issue. At present, only 50 brokerage firms are allowed to operate, and they have a cartel like control over stock trading in the domestic share market.

This has caused problems in the growth of the domestic capital market, say analysts. But the Nepal Stock Exchange (Nepse) and Securities Board of Nepal (SEBON) have shown unwillingness to distribute brokerage licences to banks. There have already been a number of recommendations made, including one from the economic panel of the Federal Parliament a year ago, to the government and SEBON to allow banks to operate stock brokerage services.

“In our country people in the government and regulatory bodies think that the function of banks is only related to the collection of deposits and lending money to borrowers. But this is not true. If we look internationally, banks are also actively engaged in operating capital and commodity market services. They have subsidiaries to work in stock brokerage and commodity firms,” says former banker Parshuram Kunwar Chhetri. According to Chhetri, distributing stock brokerage licences to banks is important for the meaningful development of the capital market.

He is of the view that doing this will be helpful to check the malpractices and anomalies in the capital market as the subsidiaries of banks working as stock brokers have to abide by rules and norms of effective corporate governance, thus enabling customers to receive quality services. “Also, banks have countrywide networks which will help to expand the stock market across the country and increase the participation of investors even from small towns and villages,” he opines. “Look how the implementation of ASBA (Application Supported by Blocked Amount) system has led to the current growth and expansion of the Nepali stock market and how banks are playing an important role in this respect.”

It is also proving very difficult for brokerage firms to raise their paid-up capital as required in the new Securities Businessperson (Stock Broker, Securities Dealer and Market Maker) Regulations. The new regulations have mandated different paid-up capital levels for brokerage firms working in federal and provincial levels ranging from Rs 30 million to Rs 1 billion.

“If banks are given stock brokerage licences, there will be no problem for them to meet this requirement,” says Chhetri, adding, “In a free-market economy, I don’t see any rationale behind giving protection only to a limited number of brokerage firms which is in fact hindering healthy competition in the stock market.” He suspects that Nepse and Sebon are acting at the behest of some individuals who do not want to lose their grip on the stock trading business.

Some decisions taken by the central bank in the recent past have also indicated that the old permit system still remains in the country in some form or another. For example, the Nepal Rastra Bank (NRB) has been exerting pressure on banks and financial institutions (BFIs) for merger and acquisitions (M&As) continuously for the last couple of years. It has been over a decade since NRB stopped issuing licences to establish new banks. In these years, the central banking authority has resorted to consolidating the financial system by reducing the number of BFIs. Nar Bahadur Thapa, former executive director of NRB says that the consolidation drive is creating gigantic financial institutions that are ‘too big to fail’ which is a matter of concern. “It is not correct to think that stability in the financial sector will be achieved only by creating big banks,” he opines. Thapa says that the financial market needs to determine the necessity of merger and acquisitions (M&As) in the BFI sector rather than by forcing banks to merge with each other.

NRB has also stopped issuing licences to merchant banks and remit service providers stating the existing number of such companies as ‘sufficient’ for the market.

Exerting Unnecessary Control
Some decisions taken by regulators and government bodies in the last few years also indicate to the exertion of unnecessary control over the activities of corporate organisations.

Bancassurance is one such example which was growing fast before the central bank directed banks to stop selling insurance products to their customers. The scheme grew in popularity after 2015/16 when banks collaborated with insurance companies to sell different types of insurance products. Bancassurance was seen as an important medium to increase the penetration of insurance in Nepal. But issuing a directive in August 2019, NRB banned Bancassurance which has not been lifted yet.

“Globally, bancassurance is a successful business model to increase the penetration of insurance as banks can educate and raise awareness in their customers about the importance of insurance services. But it was stopped abruptly in our country without giving convincing reasons,” observes Chhetri.

According to some, bancassurance was stopped because banks set targets for their staff to sell insurance products. "How could the objectives of introducing an innovative product like bancassurance be achieved without setting the sales targets?” Chhetri asks. "It was also said that bank staff were getting commission money for selling the insurance products. If that was the case, such commissions could have been removed. Ironically, an important business which carried big potential to benefit ordinary citizens, insurers and banks was ended,” he remarks.  

The Insurance Board too had taken an approach similar to NRB in terms of issuing licences in the past. The Board decided to stop issuing licences to new insurance companies in 2007 before lifting it a decade later in 2017. The decision to open licences to establish new companies has positively impacted the growth of the insurance sector. The sharp increase in the insurance penetration rate, from 8 percent in 2015 to over 44 percent in 2021, is indicative of this.

However, some new insurance companies also found it difficult to receive licences from the Board. For instance, Mahalaxmi Life Insurance, fought against the Board in the Supreme Court for nearly two years to get an operating licence; the Board scrapped the licence of Mahalaxmi in early 2017 citing the company’s failure to meet the paid-up capital requirement. After the apex court on November 2018 ruled in favour of Mahalaxmi, the Board reinstated the company’s licence.

Other ‘Closed’ Sectors
There are a number of other sectors where the entry of new investors has been indirectly barred or is difficult to invest in. Currently, the authorities do not issue licences to open new cooperative organisations, schools, medical colleges and petroleum distribution (petrol stations) companies. Similarly, licensing is also closed for travel and tour agencies, liquor producing companies, forest-resources based companies and commodities exchange and trading entities.

This has fostered an environment of unhealthy practices and widespread corruption in the country. As the entry of new investors has been discouraged in these sectors, people buy licences of existing companies by paying large sums of money. Such practices also involve government officials who take bribes to transfer the licence to the buyers. “It is unfortunate that such a situation exists in Nepal despite the country being touted as a free-market economy,” says senior economist Keshav Acharya, adding, “It shows malpractice fosters in an environment where there is low level of competition.” According to him, this adversely affects the quality of services that customers receive.

Meanwhile, the government itself is engaged in monopolising business. The state-owned Salt Trading Company has long held a monopoly over the salt trading business in Nepal. While the company has been distributing iodized salt at a subsidised rate to Nepali consumers for decades, the problems it faces in distribution often cause shortages which result in sharp price hikes in remote districts of the country. In the budget of the current fiscal year presented by the then finance minister Bishnu Paudel on May 29, the government for the first time announced to allow the private sector to import and distribute salt in the country.

Nevertheless, this announcement courted controversy as critics claimed that this provision was included in the budget to benefit industrialist Motilal Dugar, economic advisor to the then Prime Minister KP Oli, as his company Dugar Spices and Food Products also produces and distributes salt under the Century brand.

Critics say businesspersons close to people in power take undue advantage like in the days of the Panchayat, while many other investors and entrepreneurs struggle to receive even the basic services from government bodies. “We can see how the previous government favoured certain business groups. This culture of favouritism and corruption has been hindering us from creating an environment conducive to do business in Nepal,” opines Acharya.   

Problems All the Way
On the other hand, investors face various difficulties in some important sectors like hydropower where operating licences are restricted but not closed. Fulfilling all the lengthy and cumbersome procedures to get an operating licence becomes an uphill task for them. For example, large industrial and mining projects, and infrastructural projects like hydropower and transmission lines are required to do an Environment Impact Assessment (EIA) before starting construction. “They face big objections and hurdles from the Department of Forests and Soil Conservation which acts like a ‘parallel government’,” says Acharya.

Also, getting permission from the Ministry of Home Affairs to use explosives is also very difficult. Above all, acquisition of land is the most problematic issue for establishing industries and developing infrastructure projects. On top of this, there are also unnecessary interferences from local political parties. “Over the years, we have seen many potential foreign investors scrapping their plans to invest in Nepal after being forced to experience these harsh realities,” says Acharya.  

In the meantime, new businesses that have come into operation after a long struggle with bureaucratic red tape do not receive proper support from the government agencies. The problems faced by industrialists in the Bhairahawa Special Economic Zone (SEZ) and Simara SEZ are some examples in this regard. The investors there are facing a number of hassles as there is no facilitation for the import of raw materials for production as well as export of finished goods. “The businesses have become victims of the discretion of officials at frontline government offices like the Department of Industry (DoI) and the Inland Revenue Department,” says Acharya, adding, “These government bodies are meant to facilitate business but have instead turned into a means to extort investors and businesses.”

Experts say these problems are related to the lack of good governance in the country and have persisted also because of our laid-back attitude when it comes to questioning the people in the government and the bureaucracy. “We visit government offices and see citizens charters hanging on the walls of the offices but never ask questions why the institutions are not functioning and providing services according to the charter,” says Chhetri. He suggests that there is a need to start performance audits of government officials to make things right to end the bureaucratic red tapism in the country.

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